It is remarkable how many headlines in even supposedly ‘sensible’ papers announced that Labour had doubled the IHT allowance. Of course, they had not in fact increased it at all; they had simply legislated for the existing allowance to be transferable to surviving spouses or civil partners.
The new provisions apply to anyone who died on or after 9th October 2007, regardless of when their spouse or civil partner died (including deaths before 1986 when IHT was introduced). The amount of nil rate band available for transfer, will be based on the proportion of unused nil rate band at the time of death of the first spouse, but at the rate applicable at the time of the death of the survivor. In cases where a person dies having survived more than one spouse, NRB can be accumulated in respect of all deceased spouses. However, a maximum of twice the current NRB cannot be exceeded.
So, for example, if a first death occurs after 9th October 2007, all assets pass to a surviving spouse and no IHT is payable due to spouse exemptions; but the nil rate band (currently £300k) is unused. If the survivor dies in October 2008, his or her NRB which will then be £350k will be available but the unused £300k will also be uplifted to £350k; so the total NRB will be £700,000. If, however, on the first death there was say, a chargeable transfer of £150,000.00, ie 50% of NRB; then the NRB of the spouse who dies in October 2008 will be increased by 50% of the current NRB, ie £175,000 making a total of £525k.
A lot of Inheritance Tax planning has taken place utilising the one nil rate band. As a result there has been some concern as to whether wills will need to be rewritten. In anticipation of this, the Chancellor specifically confirmed that rather than re-adjusting wills now, a will may be rearranged within two years of the first death to get back to ‘square one’, so long as all the parties agree to the change. So, for example, if assets passed to a nil rate band Will Trust on the first death are then appointed to the surviving spouse within two years (but not within the first three months), such an appointment would normally be treated for IHT purposes, as if the assets were left to the spouse outright.
These proposals are to be welcomed as they will make IHT planning much easier, in particular for people who wish to leave all their assets to their spouse or civil partner. As noted above, wills should not have to be rewritten and trusts should not have to be changed. That said, anyone who has undertaken Inheritance Tax planning previously, should take this opportunity to review the situation and make sure that they understand exactly what the implications of the new rules are.
This is the catchy phrase being used to describe non-domiciled rich people who pay very little tax and whose situation is being used by some politicians to whip up righteous indignation. This rather ignores the issue of the considerable amount of money which most of them generate for the country in other ways.
From the start of next year, Mohamed Al Fayed, Roman Abramovich and up to fifteen thousand less well known expatriates, who are not domiciled in the UK but who have been living here for at least seven years, will be required either to pay a flat fee of £30,000 each year, or pay standard UK income tax on all income included that generated outside the UK. Expatriates who pay the £30.000 flat tax will also forfeit the privilege of claiming personal allowances against their income. From the revenue generating angle, proportionally this is not in fact that big a deal. The amount which the Exchequer will raise each year is around £500 million, a tenth of the amount for example, that is raised every year by Gordon Brown’s smash and grab raid on pension funds. A tenth also of what will now be raised each year with the massive hike in NIC. However, it is something. Hopefully the £30,000 ‘hit’ has been judged to be low enough not to frighten ‘Non Doms’ and their businesses away.
CAPITAL GAINS TAX
There is such a furore over the proposed Capital Gains Tax changes that something of u-turn has a already taken place and a further adjustment of position by the Chancellor seems likely. However, as things stand, from 6th April next year there will be a single rate of CGT of 18% and the annual exemption will be retained. The implications are:- those selling shares in an unquoted limited company before 6th April 2008 will have to pay an effective rate of 10%; whereas after 6th April they will have to pay 18%, in percentage terms a taxation increase of 80%.
Unit Trusts and OEICS will have a significant advantage over investment bonds.
For Private Equity investors an effective rate of tax of 10% has been replaced by a real rate of 18%. Indexation allowance has now been totally withdrawn. Although it was withdrawn from individuals with
effect from April 1998, it still applied to higher rate tax payers between March 1982 and April 1998. On 6th April 2008 the base cost of assets held before 31st March 1982 will be fixed as at 31st March value. Taper relief has been withdrawn on both business and non-business assets.
Overall the proposed changes are draconian for those who have held assets entitled to taper relief and the indexation allowance, which could substantially reduce the amount of gains subject to tax. In particular those planning to realise shares to provide income for retirement, at which point they might be basic rather than higher rate taxpayers, will suffer by paying tax at a slightly lower rate but on a much larger gain.
COMMERCIAL PROPERTY FUNDS DROP
UK commercial property funds have seen monthly total returns drop for the first time in 15 years. This could mark a turning point in the staggering bull run of property in the UK and certainly a warning for those who are still keen to hold significant percentages of a portfolio in this sector.
Norwich Union has sent out a warning letter to investment advisers, saying that the value of underlying property in its funds has dropped between 2% and 3%.
‘Transactional’ prices, ie what people are actually paying for property, have been falling since the turn of the year, but it typically takes months for this to feed into portfolio valuations. Retail property is one of the hardest hit areas though central London offices are one of the least effected. However, the general view is that a 2%-3% drop is the average across the industry.
Property unit trusts are already seeing net outflows of money which led a handful to move from an offer to bid price basis in July and this month’s news looks unlikely to stem the exodus. As ever though, it is a delicate question as to whether to get out or while the going is good or to sit out the ‘correction’.
TRADED LIFE POLICIES (TLPs)
TLPs are a American development and have been around for sometime. They were in fact covered in these pages some four years ago. The concept is simple. An elderly or dying person sells their life insurance policy in order to enjoy the benefits of the money themselves rather than leaving it for others to enjoy when they are dead. Obviously, the policies are sold at a discount and the insurance company makes its margin when the person dies and it collects the life insurance.
The TLP market first took off in the 1980′s when aids patients sold life policies to pay for their care. However, most policies are now sold by people aged 65 and over, for whom life expectancy forecasts are likely to be more accurate. Returns on TLPs tend to be predictable in the long term, as the value of a life insurance policy is known and the price paid for policies discounted.
Currently the market is worth about £6 billion and some market commentators reckon it will rise to around £80 billion over the next 20 years. The greatest risk to investors in TLPs are that sellers of policies will live longer than expected. The macabre nature of this factor might make the funds unattractive to some! Most TLP funds have penalties for encashment in the first five to seven years. Minimum investments tend to be about £25,000 to access the fund directly and £2,500 to £5,000 to put money in via a SIPP, portfolio bond or fund platform. Current yield on TLPs is between 7% and 9%.
SICKNESS BENEFIT & PRE-EXISTING CONDITIONS
A disproportionate number of complaints to the Financial Ombudsman Service nowadays concerns claimants on Sickness Policies whose claims have been turned down because they have not disclosed a pre-existing condition. The Ombudsman’s stance generally seems to be that if the undisclosed pre-existing condition was in no way connected to the condition being claimed for it tends to find in favour of the claimant. For example, if a history of gout was undisclosed and the claim was for a broken arm. However, if there is a connection, for example, angina being undisclosed and subsequently a heart attack being claimed for, then the FOS would almost certainly support the provider.
One area which had been a cause of concern in the past has now been clarified by a recent judgement. This is where there is non-disclosure but the defence is that the right questions were not asked. In the case quoted by the Ombudsman an insured person claimed for a knee injury. However, he had not disclosed that there had been injuries to this same knee in the past. He claimed that while he was aware that the policy contained an exclusion relating to pre-existing medical conditions, he had been asked no specific questions. The Ombudsman, very rightly, judged that the fact that he knew that such an exclusion existed was sufficient and rejected his claim.
FINANCIAL SERVICES COMPENSATION SCHEME
Subsequent to the Northern Rock affair, considerable publicity has been given to the fact that the maximum payout of the Financial Services Compensation Scheme (FSCS), has been increased to 100% of the first £35,000 lost per person. However, there is one factor to watch out for. Some large financial institutions with several banks as members of the same group have only a single registration under the FSCS. So, in the unlikely event of the group becoming unable to meet its obligations, savers with accounts at more than one bank within the group would only be entitled to one maximum compensation payment. For example, Halifax, Bank of Scotland, Birmingham Midshires, Intelligent Finance, SAGA and the AA are all members of the HBOS group and share one registration under the FSCS. By contrast, Royal Bank of Scotland and NatWest which are members of another group have separate registrations.
That means that in the unlikely event of either group failing, individuals with £35,000 in RBS and NatWest respectively, totalling £70,000, would be fully protected. But the same sums spread between members of the HBOS group would be eligible for no more than £35,000. Advisors with clients who seek to spread
their risks by investing no more than £35,000 in anyone institution should, as a matter of course, check whether any of the institutions being invested in have a shared registration. This can be done very quickly by telephoning the FSA helpline.
China has surged ahead of Germany for the first time to become the world’s top exporter. Figures from the World Trade Organisation show that the country overtook the US at the beginning of the year and has since overtaken Germany as well. China is responsible for 8% of global exports, which is three times Britain’s share.
Sub-Prime problems move East
The sub-prime lending crisis in America has had a knock on effect on Japanese financial institutions. The Bank of Bonsai has had to cut many of its branches and The Origami Bank has folded.
A re-adjustment of National Insurance contribution levels, which was not even mentioned in the pre-budget report, has become apparent from documents quietly released by the Treasury in the last few weeks. Currently NIC is levied at 11% of earnings up to £34,840. Workers pay at 1% on anything above that. But from next April 6th, the 11% band will apply to earnings up to £40,040 – a 15% increase in the threshold. This means that anyone on £40,040 and above will pay almost £500 a year more in NIC. At the same time the threshold at which NIC starts is being raised from £5,200 to £5,460 – a mere 5%.
The extra £4.5 billion thus raised, will presumably be used to help fund the headline grabbing cut in income tax, which Gordon Brown announced in his last budget as Chancellor. It is of course, a classic stealth tax and appears to be simply robbing Peter to pay Paul, but at the end of the day, middle England has taken another hit.
Too Many Anniversaries
According to the Standard and Poors 500, the bull market celebrated its fifth anniversary on the 9th October, the lowest point in the index having been touched on 9th October 2002. The same applies for
Morgan Stanley Capital International World index which covers the World’s developed markets and troughed on the same day.
However, taking inflation into account the S&P 500 is still well below its peak from 2000. So does that mean we are still trapped in a bear cycle? The UK FTSE 100 did not hit rock bottom until March 2003, so
assuming that shares do not nosedive, we have another few months to wait for that fifth anniversary. Moreover, the FTSE is still 3% below its all time peak, set on the last trading day of 1999. So again it is possible to argue that in spite of the consistent upward trend since 2003, we are still in the bear market.
19th October brought the 20th anniversary of Black Monday, the worst day in the history of World stock markets, when the Dow Jones industrial average fell 22.6% in a day. Just for the record 28th October was the 78th anniversary of the Wall Street Crash, which ushered in the great global Depression. It’s nice to get into November!
IFA promotion (IFAP) estimates that more than £1billion a year is overpaid in tax which should be reclaimable. The main areas of over payment are failing to reclaim taxes deducted at source from bank and building society accounts, higher rate taxpayers not claiming their 18% tax rebate on pension and gift aid contributions and simple mistakes on tax returns, very often made by the Revenue themselves.